Preparing for International Financial Reporting Standards (IFRS) January 27, 2011

Transcription

1 Preparing for International Financial Reporting Standards (IFRS) January 27, 2011

2 Introductions and Welcome 2

3 Objectives By the end of the session participants will be able to: 1. Describe the financial reporting changes in Canada, the reasons for the changes, and the timeline for IFRS adoption 2. Describe the key changes in presentation and disclosure under IFRS, and key terminology used 3. Describe some of the most significant areas of accounting differences between IFRS and Canadian GAAP 4. Describe the main areas of likely impact on different industries 5. Describe the European experience and results of the survey of fund managers 6. Describe the significant areas of impact of IFRS on the asset management industry 3

4 IFRS implications for analysts and portfolio managers

5 Agenda Financial reporting in Canada is changing how may this impact your investment decisions: Background to IFRS and ASPE IFRS Presentation and disclosure differences IFRS Accounting differences and industry issues The European Experience 5

6 Background to International Financial Reporting Standards (IFRS) and Accounting Standards for Private Enterprises (ASPE) 6

7 What is changing for your investees? Canadian GAAP is changing all enterprises need to make a change, some need to make a choice.. IFRS Current Canadian GAAP 2011 ASPE Existing CICA Handbook will be replaced in 2011! 7

8 Key dates and milestones for Canadian Enterprises (for a calendar year end company) ASPE Disclose anticipated conversion effects (optional) JAN 1, 2010 Transition date Opening Balance Sheet - collect comparatives First annual financial statements under ASPE Dec 31, 2009 Dec 31, 2010 Mar 31, 2011 Dec 31, 2011 IFRS Disclose IFRS convergence plan including quantification of anticipated effects First IFRS interims First annual financial statements under IFRS 8

9 IFRS Overview 9

10 IFRS principles Accounting standards built about a framework Principles vs. rule based Substance over form Little industry-specific GAAP Fair value model 10

11 What is IFRS and why has Canada chosen to adopt it? A global shift More than 100 countries require, permit, or are converging to IFRS IFRS adoption status in major international markets US Canada Mexico Chile Hong Kong Japan India UK Australia US GAAP Converging to IFRS Converging to IFRS Converging to IFRS IFRS Converging to IFRS Converging to IFRS IFRS IFRS Countries converging to IFRSs with the goal of adoption Countries that require or permit IFRSs Countries pursuing convergence with IFRSs, but with no plan to adopt 11

12 IFRS / US GAAP convergence plans Roadmap published Milestones set FASB require improvements in IFRS by G20 meeting confirmed intention Foreign Private Issuers who file IFRS financial statements are not required to file a separate US GAAP reconciliation 12

13 Upcoming changes to IFRS No stable platform IFRS is changing Current projects include: Leasing Revenue recognition Financial instruments Consolidation 13

14 IFRS Presentation and disclosure differences 14

15 IFRS Financial Statements terminology is changing IFRS: Statement of Financial Position CGAAP = Balance Sheet IFRS: Statement of Comprehensive Income CGAAP = Income Statement Extraordinary gains and losses are not permitted under IFRS Statement of Cash Flow required for all entities Statement of Equity Notes to the financial statements 15

16 IFRS Financial Statements note disclosure is increasing Support the numbers on the face of the financial statements to provide additional detail IFRS can be expected to result in increased disclosure Canadian early adopters (January 1, 2009) % increase in size of annual report upon transition to IFRS Thomson Reuters 12% Anooraq Resources Corp. 76% Eastern Platinum Ltd. 42% Northern Dynasty Minerals Ltd. 13% SouthGobi Energy 57% Tethys Petroleum 86% Gerdau Ameristeel Corp. 14% * Source: Estimated based on number of pages in recent IFRS statements compared to previous Canadian GAAP statements 16

17 IFRS Financial Statements Example Illustrative IFRS Financial Statements are available for download on the website please see: Illustrative IFRS Financial Statements are available for industries including: Banking, Insurance, Investment funds, Investment property, and Private equity. 17

18 IFRS accounting differences and industry issues 18

19 Potential areas of difference: IFRS compared to Canadian GAAP First time adoption of IFRS Revenue recognition Employee future benefits Financial instruments Debt/equity classification Income taxes Business combinations Foreign exchange Joint ventures Impairments Leases Property, plant & equipment Contingent liabilities and provisions Asset retirement obligations Disclosure requirements 19

20 Industry implications Energy (Oil and Gas, Mining) Asset retirement obligations Hedge accounting Exploration and evaluation costs Joint venture accounting Impairment of assets 20

21 Industry implications Agriculture and Forestry Asset retirement obligations Biological assets Joint venture accounting Impairment of assets 21

22 Industry implications Real estate Investment properties Construction contracts Borrowing costs Joint venture accounting Impairment of assets 22

23 Industry implications General Manufacturing Asset retirement obligations Hedge accounting Revenue recognition construction contracts Employee benefits Impairment of assets Lease accounting 23

24 Industry implications Financial institutions banking Financial instruments Consolidation Insurance contracts Employee benefits Revenue recognition Enhanced disclosures 24

25 Industry implications Rate regulated entities Asset retirement obligations Rate regulation Revenue recognition Employee benefits Impairment of assets Lease accounting 25

26 Accounting Standards for Private Enterprises (ASPE) A Made in Canada approach. 26

27 What is ASPE and why has it been chosen? one size does not necessarily fit all Discussion paper May 2007 Exposure draft April 2009 Final standard issued in December

28 Accounting Standards for Private Enterprises - principles Available to all private enterprises including subsidiaries of publicly accountable enterprises Based on existing Canadian GAAP Some existing interpretive guidance embedded Simplified existing financial reporting Reduced disclosure requirements Some existing accounting guidance is deleted Early adoption is permitted 28

29 Implications for financial ratios Example, impact on debt to equity ratio and EDITDA: Company XYZ - December 31, 2009 EBITDA - $5 million, Debt - $20 million*, Equity - $10 million** * Debt includes only $18 million of term loan and $2 million of liabilities related to an interest in a joint venture ** Equity includes common shares, retained earnings and $5 million of contingently puttable preferred shares Other information: XYZ has $20 million of net present value of operating lease commitments XYZ has $2 million of previously written down indefinite-lived intangible assets (not goodwill) which now prove to be fully recoverable XYZ has an interest in a joint venture for which it currently accounts for using proportionate consolidation; $1 million of losses included in retained earnings relate to the interest in the joint venture of which $0.5 million was incurred in 2009 XYZ elects to fair value a building on transition, and records a transitional adjustment of $2m. The building is depreciated over a remaining life of 10 years. 29

30 Implications for Financial Ratios Example impact on debt to equity ratio and EBITDA (cont d) Debt Equity D/E Ratio EBITDA Debt / EBITDA Current C GAAP IFRS ASPE IFRS differences 1) Operating leases qualify as capital leases; $20m of commitments on BS 2) $5m of preferred shares classified as debt rather than equity 3) Impairment losses of $2m recognized in prior periods reversed 4) Fair value adjustment to building is recorded in equity ($2m) less $0.2m depreciation charged in the year ASPE differences 1) Interest in JV uses the cost method rather than proportionate consolidation 2) Impairment losses of $2m on intangibles cannot be reversed 3) Fair value adjustment to building is recorded in equity ($2m) less $0.2m depreciation charged in the year 30

31 The European Experience 31

32 What was the reaction of investors when Europe converted to IFRS? In 2006, 187 fund managers participated in an IFRS survey: 79% believed transition to IFRS was a positive change Key benefits of IFRS included: Improved transparency and management information, and consistency of reporting IFRS influenced investment decisions Source: 2006 /IpSOS MORI survey 32

33 Questions 33

34 Useful sources of information

35 Useful sources of information IFRS website Putting IFRS in Motion Series (industry specific): Banking Insurance Mining Oil and Gas Real Estate Retail and Consumer Energy and Utilities 35

36 Asset Management IFRS for managers Key items to address moving towards 2011

37 Agenda 1. National Instrument and regulatory requirements 2. IFRS heat map 3. IFRS 1 4. Common accounting areas impacted by IFRS 37

38 National Instrument and regulatory requirements 38

39 National Instrument Application 1) This Instrument does not apply to investment funds. 2) This Instrument applies to all financial statements and interim financial information delivered by registrants to the securities regulatory authority or regulator under National Instrument Registration Requirements and Exemptions Excerpt from October 1, 2010, Supplement to OSC Bulletin 39

40 NI Part 12 requirements Registered firms must deliver annual financial statements and unaudited financial information (some exceptions). All financial statements and interim financial information delivered under NI must comply with NI Acceptable accounting principles, auditing standards and reporting currency. Excerpt from October 1, 2010, Supplement to OSC Bulletin 40

41 October 1, 2010 Amendments to NI Annual Financial Statements (Section 12.10) 1) Annual financial statements delivered to the regulator for financial years beginning on or after January 1, 2011 must include the following: a) a statement of comprehensive income, a statement of changes in equity and a statement of cash flows, each prepared for the most recently completed financial year and the financial year immediately preceding the most recently completed financial year, if any; b) a statement of financial position, signed by at least one director of the registered firm, as at the end of the most recently completed financial year and the financial year immediately preceding the most recently completed financial year, if any; c) notes to the financial statements; and 2) The annual financial statements must be audited. Excerpt from October 1, 2010, Supplement to OSC Bulletin 41

42 October 1, 2010 Amendments to NI Interim Financial Information (Section 12.11) 1) Interim financial information delivered to the regulator for interim periods relating to financial years beginning on or after January 1, 2011 may be limited to the following: a) a statement of comprehensive income for the 3-month period ending on the last day of the interim period and for the same period of the immediately preceding financial year, if any; b) a statement of financial position, signed by at least one director of the registered firm, as at the end of the interim period and as at the end of the same interim period of the immediately preceding financial year, if any. 2) The interim financial information delivered to the regulator must be prepared using the same accounting principles applied in the annual financial statements. Excerpt from October 1, 2010, Supplement to OSC Bulletin 42

43 Exemptions for financial year beginning in 2011 Annual financial statements, the interim financial information, and the working capital form may exclude comparatives. This impacts transition date! First interim financial information, completed working capital form and description of any NAV adjustments (IFM) must be delivered no later than 45 days after the end of the interim period. * Position may differ for managers who are subsidiaries of public companies Excerpt from October 1, 2010, Supplement to OSC Bulletin 43

44 October 1, 2010 Amendments to NI Sections 3.2(3) & (4) 3) Financial statements and interim financial information required for registrants under NI must a) be prepared in accordance with Canadian GAAP applicable to publicly accountable enterprises, except that any investments in subsidiaries, jointly controlled entities and associates must be accounted for as specified for separate financial statements in IAS 27, and b) in the case of annual financial statements, i) include the following statement: These financial statements are prepared in accordance with the financial reporting framework specified in paragraph 3.2(3)(a) [subsection 3.2(4) for first year] of National instrument Acceptable Accounting Principles and Auditing Standards for financial statements delivered by registrants. and ii) describe the financial reporting framework used to prepare the financial statements. 44

45 October 1, 2010 Amendments to NI ) Despite paragraph (3)(a), financial statements and interim financial information for periods relating to a financial year beginning in 2011 may be prepared in accordance with Canadian GAAP applicable to publicly accountable enterprises, except that a) any investments in subsidiaries, jointly controlled entities and associates must be accounted for as specified for separate financial statements in IAS 27, b) comparative information relating to the preceding financial year must be excluded, and c) the first day of the financial year to which the financial statements or interim financial information relates must be used as the date of transition to the financial reporting framework. Transition Date January 1,

46 Auditors Report The financial statements and related auditors report should be prepared under a special purpose framework. Special purpose framework A financial reporting framework designed to meet the financial information needs of specific users. The financial reporting framework may be a fair presentation framework or a compliance framework. CAS 800 provides guidance on the use of this framework. 46

47 IFRS heat map 47

48 IFRS heat map The more significant areas that could impact IFRS managers are summarized below. Graph summary of potential impact areas High First Time Adoption Financial Statements Impact Low Revenue Recognition Provisions and Contingent Liabilities Debt/equity classification Financial Instruments Impairment of Assets Income Taxes Property, Plant and Equipment Leases Disclosures Low Level of Implementation Effort High The differences presented therein have been rated high, medium or low, based on a generic assessment of the impact on financial statements and implementation effort. Each company s facts and circumstances will be different. 48

49 IFRS 1 49

50 Scope of IFRS 1? Mandatory guidance for entities preparing IFRS financial statements for the first time. First financial statement to contain an explicit and unreserved statement of compliance with IFRS only if the entity fully complies with IFRS regardless of the fact that the regulator requires a disclosed basis of accounting. IFRS 1 does not apply to companies that already apply IFRS for local reporting purposes (ie: can only apply IFRS 1 one time) 50

51 IFRS 1 General Principles Requires a first-time adopter to apply the version of IFRS effective at the reporting date retrospectively, as if the Company had always presented financial statements in accordance with IFRS (subject to certain exemptions and exceptions) Reporting date is the end of the latest period covered by financial statements or interim financial information YE Dec 31, 2011 or Q1 March 31, 2011 (first annual or interim filings for a calendar year company) Disclosures required to highlight transition 51

52 Date of transition The date of transition to IFRS is defined as beginning of the earliest period for which an entity presents full comparative information under IFRS in its first IFRS financial statements Under NI , January 1, 2011 for calendar year company (unless comparatives were disclosed then January 1, 2010) 52

53 Opening balance sheet Opening IFRS balance sheet is the starting point for all subsequent accounting under IFRS. Prepare an opening IFRS balance sheet at date of transition January 1, 2011 for calendar year-end companies (unless additional IFRS comparative year presented) Reflects all adjustments from Canadian GAAP to IFRS Disclose reconciliation of equity under GAAP (12/31/10) to equity under (1/1/11) 53

54 Opening balance sheet (cont d) Recognize assets and liabilities required by IFRS De-recognize any assets and liabilities that don t qualify for recognition under IFRS Remeasure all recognized items in accordance with IFRS Record impairment charges on opening balance sheet Classify assets, liabilities and equity as required under IFRS Net impact of these adjustments will usually be recorded in opening retained earnings (or other equity accounts). 54

55 Accounting policies Select accounting policies that comply with IFRS in force at the reporting date Accounting policies should be applied retrospectively to opening IFRS balance sheet (Jan 1, 2011) Recognize changes in accounting policies generally in equity in the opening IFRS balance sheet Transitional provisions of individual IFRS standards DO NOT APPLY to a first-time adopter (apply IFRS 1). 55

56 Exemptions and exceptions Mandatory exceptions from retrospective application Optional exemptions from retrospective application Costs Benefits 56

57 Mandatory exceptions Four mandatory exceptions from retrospective application: De-recognition of financial assets and financial liabilities Hedge accounting Estimates Non-controlling interests 57

58 Accounting estimates IFRS 1 prohibits use of hindsight to create or revise estimates under Canadian GAAP unless objective evidence of an error. New estimates are based on information known at the opening IFRS balance sheet date (Jan 1, 2011) Proposed amendments by IASB on IFRS 1 Prohibits use of hindsight! 58

59 IFRS optional exemptions Are they likely to apply to managers? Yes X X No Exemption X Business combinations Fair value or revaluation as deemed cost (ie: PPE) X Employee benefits X Cumulative translation differences X Compound financial instruments Transition date for subsidiaries, associates and joint X ventures Designation of financial assets and financial liabilities X Share-based payments If relevant, then consult! 59

60 IFRS Optional Exemptions Are they likely to apply to managers? Yes No Exemption X Insurance contracts X Arrangements with leases X X X X X Fair value measurement of no-active market financial instruments at initial recognition Service concession arrangements Borrowing costs Investments in subsidiaries, jointly controlled entities and associates Decommissioning liabilities included in the cost of property, plant and equipment (PP&E) If relevant, then consult! 60

61 Disclosures IFRS requires enhanced disclosures, even in situations where there might not be any CGAAP to IFRS differences Some of the more common areas where additional disclosures are required include: IAS 1 Presentation of Financial Statements IAS 24 Related Party Transactions Areas requiring management estimates (sensitivities) IAS 7 Cash Flow Statement IAS 12 Income Taxes IAS 37 Provisions, Contingent Liabilities and Contingent Assets IFRS 1 First Time Adoption of IFRS 61

62 Illustrative Balance Sheet Sample Co. Statement of Financial Position (in Canadian dollars) December 31, 2011 $ January 1, 2011 $ Assets Current assets $ $ Cash 1, Marketable securities 1, Accounts receivable 62

63 Illustrative Income Statement Sample Co. Statement of Income For the year ended December 31 (in Canadian dollars) 2011 $ Revenue Management fees Interest income 92,000 2,450 94,450 63

64 Common accounting areas impacted by IFRS 64

65 Common accounting areas impacted by IFRS (cont d) Area Key issues What needs to be considered Management fees Revenue from service contracts is recognized in a manner consistent with the performance of the service being rendered, to the extent that the collection of the revenue is reasonably certain as required by Section 3400, Revenue. IFRS revenue recognition principles are similar to Canadian GAAP, but with less detailed guidance. Principles for revenue recognition under IFRS are to recognize revenue when probable future economic benefits, revenue and costs are measurable, risks and rewards have been transferred. In most circumstances, collection of management fee income from Funds managed is reasonably certain and such fees are recognized in the period in which they arise. Performance fees Performance fees may differ considerably in their structure and often involve complexities such as multi-year arrangements and high watermarks. Revenue from such arrangements is recognized only to the extent that the amount of consideration to be received is reliably measurable and ultimate collection is reasonably certain as required by Section 3400, Revenue. Canadian GAAP is generally aligned with IFRS for revenue recognition as noted above. The criteria described above can be used to assess when these performance fees may be recognized. 65

66 Common accounting areas impacted by IFRS (cont d) Area Key issues What needs to be considered Trailing commissions Trailing commissions paid to third parties are accounted for as services are received, in accordance with the terms of the contractual arrangement with the investment advisor. Certain trail commissions may fit the definition of financial liability under IFRS, thereby requiring them to be recognized on the balance sheet upon sale of the investment and the associated revenue recognized over the term of the contract. How these are recognized may impact a company s cost and incentive structures Trailing commissions are typically considered to be incurred over time to the extent that the payment is dependent on an investor retaining an investment with the manager for a period of time. Such costs are accrued and accounted for as expenses over the period during which services are provided. Placement fees A third party adviser may be paid an upfront finders fee for sourcing investor assets for the fund. Placement fees under IAS 18 Appendix likely meet the definition of incremental costs attributable to securing an investment management contract. Recognized as an asset and amortized. 66

67 Common accounting areas impacted by IFRS (cont d) Area Key issues What needs to be considered Upfront commissions paid to financial advisors Initial fees paid to third parties (e.g. deferred commissions paid to advisors by investment managers) are deferred and amortized over the period during which revenue is expected to be earned. Under IFRS, it is likely that many upfront commissions previously deferred under Canadian GAAP will continue to qualify for deferral. Key considerations as follows: Including related amortization, impairment and derecognition Amortization systematic basis Two views: a) IAS 18 Appendix treated as incremental costs attributable to securing an investment management contract. b) Intangible asset (IAS 38, C GAAP 3064) Basis of amortization, impairment and derecognition is getting renewed emphasis given the changeover to IFRS. Impairment CGU and how to define lowest level Derecognition methodology to be developed (consider at unit level versus tranche level?) 67

68 Common accounting areas impacted by IFRS (cont d) Area Key issues What needs to be considered Provisions and contingent liabilities When should provisions be recognized? This is important given the number and type of legal issues outstanding at any point in time. A provision should be recognized if it is probable that a liability has been incurred. Recognize on the basis of legal OR constructive obligation Canadian companies generally use the threshold of 75% when determining whether an event is likely to occur. The probable threshold used under IFRS is lower, generally accepted to be more than 50%. Therefore, additional provisions may be recorded under IFRS using the lower threshold. IFRS requires that, where the effect of the time value of money is material, the long-term portion of a provision will have to be discounted. Recognition of constructive obligations will become more commonplace under IFRS. Onerous contract: Contract in which the unavoidable costs of meeting the obligation exceed the economic benefits expected to be received under it. Recognize present obligation under the contract as a provision, measured at the lower of fulfillment cost and compensation (or penalties) arising from failure to fulfill it. 68

69 Common accounting areas impacted by IFRS (cont d) Area Key issues What needs to be considered Debt/equity Distinction of debt and equity instruments. Anything in equity that is other than a common share, should be carefully evaluated to determine if it qualifies for equity classification under IAS 32 Issues are surfacing (REITs, income trusts, mutual funds, convertible debt), including Contingent settlement and multiple settlement provisions Puttable shares Derivatives on own equity Broad principles are similar: Classify as liability if: Issuer could be obliged to settle in cash or another financial instrument, or Instrument will or may be settled in a variable number of the entity s own equity instruments 69

70 Common accounting areas impacted by IFRS (cont d) Area Key issues What needs to be considered Financial instruments How are financial instruments, including derivatives and hedges accounted for and disclosed? Decide on designation/classification at date of transition and subsequent measurement: trading securities (fair value through profit or loss) available for sale (fair value through OCI) held to maturity securities (amortized cost) loans and receivables (amortized cost) derivatives (fair value through profit and loss) investment in equity instruments not quoted in active markets and FV not reliably determinable (cost) derivatives linked to and settled in unquoted equity instruments (cost) Note: financial instrument accounting is relatively similar given the recent adoption of Section Some subtle differences. AFS financial assets AFS financial assets can be measured at cost only when: IFRS: there is no quoted market price in an active market and fair value cannot be reliably measured. There is a presumption under IFRS that FV can be reliably measured. Canadian GAAP: there is no quoted price in an active market. 70

71 Common accounting areas impacted by IFRS (cont d) Area Key issues What needs to be considered Financial instruments How are financial instruments, including derivatives and hedges accounted for and disclosed? Impairment At each period, there is a need to assess whether objective evidence exists that a financial asset is impaired. IFRS: if objective evidence of impairment then a charge to income is recorded. Canadian GAAP: similar to IFRS, however under Canadian GAAP for AFS securities a loss is recognized only if is other then temporary. Foreign exchange Foreign exchange on AFS investments is measured as follows: IFRS: for monetary AFS assets the change in FV attributable to foreign exchange is recognized in P&L. Remaining FV change goes to OCI. For non-monetary AFS financial assets (equity instruments), entire change in FV, including foreign exchange, is recognized in OCI. Canadian GAAP: entire change in FV, including foreign exchange, for all AFS assets is recognized in OCI. 71

72 Common accounting areas impacted by IFRS (cont d) Area Key issues What needs to be considered Property, plant and equipment (not including investment properties) How should capital assets be classified and valued: a) at time of transition and b) on an on-going basis. IFRS requires assets to be disaggregated into the underlying components ( componentization approach ) and amortized over their separate lives. This approach may be at a more detailed level than currently applied and may involve significant management judgement as well as additional analysis than is currently being carried out by managers. Under IFRS, property, plant and equipment can be measured using either using the cost model or the revaluation model. Under the revaluation model, organizations can periodically revalue property, plant and equipment (other than investment property, which is accounted for under IAS 40) to fair value. Managers will have to explicitly assess the reasonableness of depreciation rates, useful lives and residual values of items of property, plant and equipment at least at each financial yearend. 72

73 Common accounting areas impacted by IFRS (cont d) Area Key issues What needs to be considered Impairment testing CGU definition and the one step impairment test. One-step impairment test calculated by comparing carrying values to the greater of discounted cash flows and fair value less cost to sell, which differs from the Canadian requirement of using undiscounted cash flows. The recoverable amount of each asset or cash generating unit ( CGU ) must be determined based on the higher of its fair value less costs to sell and value-in-use (i.e. its recoverable amount). Under IFRS, impairment exists when the recoverable amount of an asset or a CGU is less than its carrying value. Property, plant and equipment and finite lived intangible assets must be reviewed to determine whether an indication of impairment exists at each reporting date. Indefinite lived intangible assets (and goodwill) are required to be assess for impairment on an annual basis, or when impairment indicators are identified. May result in the recognition of an impairment loss that would not be required under Canadian GAAP. Impairment charges for property, plant and equipment and intangible asses (in certain circumstances) are subject to reversal under IFRS, which may result in more volatility in the income statement and implementation of processes to track original depreciated balances in the event of an impairment reversal. 73

74 Common accounting areas impacted by IFRS (cont d) Area Key issues What needs to be considered Income taxes Differences in the accounting for tax provisions. IFRS is similar to existing Canadian GAAP accounting for income taxes. However there are differences when you get into the details. For example, the assessment of tax assets and liabilities, as a result of filing positions taken, is assessed for accounting purposes based on the expected outcome in which the asset will be recovered or the liability will be settled. This differs from Canadian GAAP as Canadian GAAP has several ways of assessing these matters. In addition, corresponding tax adjustments will need to be made as a result of IFRS adjustments. 74

75 Common accounting areas impacted by IFRS (cont d) Area Key issues What needs to be considered Stock-based compensation Differences in the accounting for stock- based compensation. IFRS is similar in many respects to existing Canadian GAAP accounting for stock- based compensation, but there are several measurement and other differences. For example, under IFRS, if a stock-based award is granted with a graded vesting schedule, each tranche must be accounted for as a separate arrangement. 75

76 Common accounting areas impacted by IFRS (cont d) Area Key issues What needs to be considered Guarantees Does a subsidiary s guarantee of a parent s debt or that of a company under common control fall within the scope of IAS 39 and thus require recognition on the subsidiary s stand-alone financial statements? Unlike Section 3855, IAS 39 does not contain any exceptions for related party guarantees issued to a parent or a subsidiary under common control. Financial guarantees fall within the scope of IAS 39 unless the guarantor had previously asserted that such guarantees are insurance (see IAS 39.2), which is unlikely to be the case for Canadian companies transitioning to IFRS. Under IAS 39, such contracts would be accounted for initially at fair value (see IAS and AG4(a)) and subsequently (unless designated as at fair value through profit or loss, if permitted) at the higher of the amount (a) determined in accordance with IAS 37; and (b) initially recognized less, when appropriate, cumulative amortization recognized in accordance with IAS 18, Revenue (IAS 39.47(d)). If a subsidiary has guaranteed a debt of its parent company for no premium, the subsidiary would recognize a liability at fair value equal to the premiums which would have been charged by a third party for such a guarantee. The resulting debit would likely be treated as a distribution by the subsidiary to the parent company. 76

77 Form F1 Calculation of excess working capital Component 1. Current assets 2. Less current assets not readily convertible into cash (e.g., prepaid expenses) 3. Adjusted current assets Line 1 minus line 2 = 4. Current liabilities 5. Add 100% of long-term related party debt unless the firm and the lender have executed a sub-ordination agreement in the form set out in Appendix B and the firm has delivered a copy of the agreement to the regulator 6. Adjusted current liabilities Line 4 plus line 5 = 7. Adjusted working capital Line 3 minus line 6 = 8. Less minimum capital 9. Less market risk 10. Less any deductible under the firm s bonding or insurance policy 11. Less Guarantees 12. Less unresolved differences 13. Excess working capital Potential impacts of IFRS 77

78 Questions 78

79 Thank you Derek Hatoum, Partner, PricewaterhouseCoopers Phone: Rebecca L. Vass, Director, PricewaterhouseCoopers Phone: This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers LLP, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it PricewaterhouseCoopers LLP. All rights reserved. In this document, refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership, which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity.